Money: Tax-Free Savings - How to put it all away

So the Government wants us all to save more money. Here, and on pages 16 and 17, we examine the options

THE Individual Savings Account flagged by Geoffrey Robinson, the Paymaster-General, last week is the latest measure to try to persuade us to save more. Just over 10 years ago Nigel Lawson introduced personal equity plans; in 1991 John Major brought in tax-exempt special savings accounts; and in 1999 we will be able to invest in individual savings accounts, which will replace both PEPs and Tessas.

The ISA is broader-based and more flexible and is intended to extend the tax-free savings habit to another 6 million people, doubling the number who have PEPs or Tessas. The initiative is welcome because we still we do not save as tax-efficiently as we should. A survey early this year by IFA Promotions, which puts people in touch with independent financial advisers, showed that as a nation we pay pounds 5.5bn more in tax than we need to, equal to pounds 158 a head. Much of this was due to us not taking advantage of tax-saving plans.

As we have become more sophisticated about investment so the choice of tax-efficient products has grown. Once, it was just National Savings. Then as the government of the day became concerned about pensions, retirement products were encouraged. Nowadays, there is a wide range of tax-efficient investments, and this survey looks at the main saving opportunities.

On the fixed-interest front National Savings (NS) is often overlooked, mainly because the interest rates have lagged behind. In fact, the Chancellor now expects National Savings to attract only pounds 2bn this financial year against the original target of pounds 3bn.

Last week saw the fourth rise in NS interest rates this year. It offers a variety of different schemes for both lump sum and regular savings. Some pay out regular income, some accumulate the interest paying out at the end of a fixed period. Many accounts are tax free while others are particularly attractive to non-taxpayers.

The Ordinary Account is the most popular, and more than 16 million of us have one. Aimed at small savers this now pays 2 per cent, but invest more than pounds 500 and the interest rate rises to 3 per cent. The first pounds 70 of interest is tax free, pounds 140 to a couple with a joint account. However, building society accounts have almost always paid better, even after tax.

NS accounts that do compete with other saving schemes include Income

Bonds. These are particularly attractive to non-taxpayers, and from 8 January will pay 7 per cent gross for deposits under pounds 25,000 and 7.25 per cent for those above. Interest is paid in the form of a monthly income. However, three months' notice must be given of any withdrawal.

Of more appeal to taxpayers are five-year Fixed Interest Savings Certificates, which are tax free. Up to pounds 10,000 can be invested. The current 44th Issue offers 5.25 per cent.

If you are over 60 and want a guaranteed monthly income you could look at the National Savings Pensioner Bond. Up to pounds 50,000 can be invested, or pounds 100,000 into a joint account. It pays out at a rate of 7 per cent fixed for five years, after which it can be cashed in. Other NS saving schemes include index-linked investment that protects against inflation and special children's bonds. Details of all NS savings should be available at your post office.